Abstract Service paradox may arise when service derivatives are implemented in manufacturing enterprises. Therefore, the supply and demand value creation model is constructed based on the influence of enterprises’ cost and customer utility. Thereby, the optimal decision of product manufacturing and service derivation in manufacturing enterprises is studied. And the influence of service derivation on supply and demand value creation is discussed. The results showed that there is a boundary measured by unit production cost，when the cost is within the boundary，manufacturing company should choose to generate service derivative to create more value for both company and customer；otherwise，when manufacturing company generates service derivative beyond the boundary，it will lead to “service paradox” dilemma. In addition，manufacturing company generates service derivative with low unit production cost coefficient，or develops derivative service that can solve customer’s problem effectively to enable the value co-creation.
